A hedge fund is considering making a bid for Smithfield Foods, corporate owner of the John Morrell & Co plant in Sioux Falls. / Jay Pickthorn - Argus Leader

Written by

Christopher Doering

Gannett Washington Bureau

WASHINGTON — Starboard Value LP, an activist investor group, told Smithfield Foods shareholders Tuesday it is working with interested buyers who might be willing to pay “substantially” more than Shuanghui International Holdings offered in May to acquire the pork giant.

Smithfield, owner of the John Morrell plant in Sioux Falls, announced in May it would be acquired by Shuanghui for $4.7 billion, or $34 a share, the largest takeover of a U.S. company by a Chinese firm.

In a letter to Smithfield shareholders, Starboard said it is talking with potential buyers to come up with a single bid for the company that “is likely to result in a superior proposal” to Shuanghui’s offer.

Starboard, which holds a 5.7 percent stake in Virginia-based Smithfield, has argued the world’s largest pork processor and hog producer could command a higher price if the company was split into three parts — hog farms, pork sales and international operations — and then sold.

The activist investor said in the letter that it announced its opposition to the proposed merger in hopes that Smithfield would delay the Sept. 24 vote. Under the deal, the company’s board is allowed to consider alternative merger proposals only before that date, and must hold the meeting as scheduled unless it does not have enough support to approve the takeover, Starboard said. The transaction also is required to close by Nov. 29.

“It is our belief that the proposed merger undervalues Smithfield and that with more time, an alternative proposal to the board at a superior price for shareholders could be available,” Starboard said in the letter.

“We believe the board failed to run a full and fair process to sell the company, in whole or in part to ensure that shareholders realized the highest possible price.”

The hedge fund said while it will vote against the merger now in hopes that a superior deal will emerge, it could end up supporting the Shuanghui proposal if an alternative transaction fails to happen.

A Smithfield spokeswoman declined to comment on the letter.

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Smithfield shareholders are scheduled to meet Sept. 24 to vote on the transaction. In addition to stockholder support, the purchase must receive antitrust clearance and be approved by the U.S. Committee on Foreign Investment, which reviews such transactions for their effect on national security. CFIUS initially conducted a 30-day review into the merger but chose in July to extend the process for an additional 45 days.

Washington lawmakers have expressed concern the takeover would squeeze the U.S. pork supply by shipping more of the meat to China and leave the U.S. susceptible to food safety concerns that have plagued Chinese companies, including Shuanghui.

Smithfield has tried to ease concerns of lawmakers and other critics who have questioned the deal by repeatedly promising that jobs will be protected and the safety of the U.S. food supply would be maintained. The firm also said the deal would benefit U.S. pork farmers by giving them greater access to meat-hungry consumers in China, South Korea, Japan and other Asian countries.

Matthew Diersen, a South Dakota State University agricultural economist, said Smithfield is an attractive asset for a bidder because it controls the whole process — from farm production to sale at retail locations. The result is the company is more easily able to respond to increased global consolidation in the pork market as well as ongoing animal welfare and food security issues than its competitors.

“Their advantage has been that integration,” Diersen said.

“That’s one of the reasons that Smithfield as a company looked attractive to Shuanghui.”

For Shuanghui in particular, he said the takeover would allow it to gain insight into the American pork market and acquire intellectual property that could be used in the growing Chinese market, potentially making Smithfield more valuable than it would be for a U.S.-based processor or retailer.

In a separate statement on Tuesday, Shuanghui said it has secured about $4 billion in loans from eight banks to help fund the Smithfield purchase.

Founded in 1936 and based in Virginia, Smithfield sells packaged products under its own name and other popular brands, including Farmland, Armour and Cook’s.

The company employs more than 46,000 people in four countries and 25 states, including South Dakota.

Shares in Smithfield rose 15 cents Tuesday to $33.68 in trading on the New York Stock Exchange.